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Dive Brief:
- A group of 27 U.S. senators is calling on the Education and Justice departments to loosen policies covering student loan borrowers who pursue bankruptcy.
- The federal government’s aggressive attempts to block loan discharges in bankruptcy cases has exacerbated borrowers’ problems, the lawmakers wrote in a letter Thursday to Education Secretary Miguel Cardona and Attorney General Merrick Garland.
- The senators – headlined by Majority Leader Chuck Schumer, Majority Whip Dick Durbin and education committee Chair Patty Murray – want the Education Department to update guidance issued in 2015 that outlines when loan holders should agree to a borrower’s debt being canceled.
Dive Insight:
Erasing student loans in the bankruptcy process does not come easy. The sole method under bankruptcy starts with individuals bringing a separate action within their cases, what’s known as an adversary proceeding.
They then must prove the debt would create “undue hardship,” which the lawmakers wrote in their letter is a standard most courts have interpreted narrowly.
Lenders often fight these efforts. The Education Department has objected to loan discharges during bankruptcy proceedings, even during the pandemic, which critics say runs counter to the Biden administration’s pledge to protect vulnerable and low-income populations.
When federal agencies oppose undue hardship discharges, it requires “debtors to effectively demonstrate a certainty of hopelessness before they can obtain relief,” the senators wrote.
An essay published in the Minnesota Law Review said the department’s current standards for evaluating these borrowers are too strict. Borrowers during the legal process have to produce evidence of their earnings and prove they won’t be able to pay their bills in the future.
“This calculus is especially common for borrowers on income-driven repayment (IDR) plans, which may allow for nominal payments over a very long term,” the essay said. “The result is that extremely few student borrowers, especially those on IDRs, can surpass the hurdles currently required to show that their education debt is an undue hardship.”
However, the department is making changes.
Last month, Cardona announced he asked the Justice Department to pause some bankruptcy cases while the Education Department retools its policies.
A Education Department spokesperson said officials received the lawmakers’ letter and look forward to responding directly to the authors.
The spokesperson said the agency is “committed to revising our approach to bankruptcy to streamline the process and ensure that borrowers get a fair shot” at discharge. The Justice and Education departments are working together to make sure the federal government does not appeal cases in which a court found undue hardship, the spokesperson said.
Borrowers in adversary proceedings can request that courts halt further legal actions in their cases, the spokesperson noted.
A Justice Department representative did not respond to a request for comment Friday.
Lawmakers in their letter applauded the Education Department opting in February to no longer appeal a federal court decision discharging $100,000 of one borrower’s loan debt.
Ryan Wolfson, an epileptic man, had difficulty finding full-time employment after graduating from college in 2010. Nearly a decade later, when working for ride-sharing services, he had a seizure and totaled his vehicle. The judge ruled in Wolfson’s favor in his bankruptcy case. The Education Department initially appealed before backing down.
“Unfortunately, this case has been an exception to the standard practice,” the lawmakers wrote Thursday.
They requested Cardona promptly issue new guidance that would make proceedings fairer for borrowers who have demonstrated legitimate hardships.
The senators — who are all members of the Democratic caucus — want the new guidance to identify the circumstances in which a borrower would be entitled to debt cancellation. They are also asking the department to avoid adding to borrowers’ bills by accepting their documentation of undue hardship without engaging in a formal legal discovery process.
And they don’t want borrowers to be disqualified from having their loans discharged if they participate in an income-driven repayment plan.
More than a dozen advocacy groups in February demanded the Education Department stop blocking borrowers who are seeking loan debt relief, noting legislative efforts to ease their financial burdens.
“The department’s opposition of these student debt discharges appears at odds with greater efforts to enact meaningful reform,” the groups wrote to Cardona.
A bipartisan Senate bill introduced last year would make federal student loans eligible for discharge in bankruptcy proceedings a decade after borrowers make their first payments. It would also require colleges that have more than one-third of their students receiving student loans to partially reimburse the government if a debt is later discharged during bankruptcy. This would only apply to colleges that had students with consistently high default and low repayment rates.
A House bill also proposed last year would have allowed private loans to be discharged without demonstrating undue hardship.
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